For the past seven years, the Tax Authority used to accept the income
declaration made by businesses in order to determine
tax payments, without any additional assessments of
its own. This has changed for good, says the
Authority, which has dispatched its own taskforce to
survey the assets of small businesses, which will
then be used for determining tax payments, writes
EDEN SAHLE, FORTUNE STAFF WRITER

Small Businesses Threaten Shutdown, Over New Tax
Pressures

Zelalem Banteyewalu, a graduate of Addis Abeba University’s School of
Fine Arts and Design, opened an advertising shop in
2010 on the second floor of the Kirkos Trade Centre.
He started his businesses last year by providing
advertising services on banners, T-shirts and
billboards, and he even hired one employee to manage
his shop during his absence.

Zelalem has become one of the 8,094 registered Turnover Tax (ToT)
payers in Kirkos District, many of whom were lining
up to pay their annual taxes for the fiscal year of
2011/12 in the Wereda 10 Office, this week.

Kirkos District, where Zelalem’s business is located, has made a
revision on the tax estimation three times in
2010/11, blaming the galloping inflation rate, which
stood at 38.1pc in June 2011. This has resulted in
Zelalem paying more in taxes.

Zelalem was held up by surprise, along with his fellow tax payers at
the Wereda 10 office, which is delegated by the
Ethiopian Revenues and Customs Authority (ERCA) to
collect tax payments from category “C.”

His tax payments used to be based on his income declaration, according
to the voluntary system enforced seven years ago,
which averaged 356 Br a year. Zelalem’s tax duty,
however, has escalated to 16, 373 Br, representing a
217pc increase, after being classified as a category
“C” taxpayer.

Among the 84,805 taxpayers registered in the capital city, 48,831 are
like Zelalem, who are under category “C” taxpayers,
covering 57.6pc of all taxpayers, according to data
from the ERCA.

In the past seven years, ERCA used to accept taxpayers income
declarations for determining tax payments, without
any additional assessments of its own.

A new tax evaluation directive, however, has increased Zelalem’s tax
payments, along with the tax payments of 8,094
taxpayers in the Kirkos District, who are forced to
be registered as category “C” taxpayers, who are
required to make ToT payments.

ERCA, which introduced the new directive three months ago, has
conducted a campaign to register taxpayers from
November until March 2011, after only 5,052
taxpayers in Kirkos took the opportunity to register
as taxpayers, avoiding penalties from the tax
authority.

The move was part of an effort to increase the country’s tax base, and
an effort to reach the forecasted 12.1pc tax
contribution of the Gross Domestic Product (GDP),
which is estimated to be 471.8 billion Br by the
2011/12 fiscal year, according to sources in ERCA,
who are not authorised to officially comment.

Tax contributions of the GDP were 11.3pc of GDP in the 2009/10 fiscal
year, and 11.7 of GDP in the 2010/11 fiscal year,
bringing in 383.4 billion Br and 425.6 billion Br,
respectively.

Under the GTP, ERCA aims to increase tax contributions to 17pc of the
nominal GDP by the fiscal year of 2014/15, placing
pressure on the tax authority.

With the aim of registering more taxpayers and broadening the tax base
to reach its house goal collecting 70 billion Br
during the fiscal year of 2011/12, the authority
recruited 1,200 fresh university graduates from
Addis Abeba University (AAU), the oldest and largest
higher education institution.

The fresh graduates, whom ERCA trained in the basics of marketing
survey for three months, surveyed 95,000 business
establishments around the city over a three-month
period.

Besides the market survey, members of the taskforce assessed the
purchase bills of new taxpayers, their observable
assets, including furniture and equipments, and
their declarations of income and expenses.

The taskforce made taxpayers who do not keep accounting books sign a
single copy of the new assessment of their tax duty,
which would be deposited with the ERCA after the
estimation of tax.

ERCA’s fresh graduates in the taskforce reported that 9,000 people were
not paying their tax duties, 11,000 taxpayers were
not paying value added tax (VAT), and 36,000
businesses were still required to use cash
registers.

The members of the taskforce, which were instructed to review the
outdated, seven-year-old tax valuation system, and
replace it with an all new valuation system in all
of the 10 districts of the capital, claimed that
11,000 businesses, including Zelalem’s, were making
less tax payments than was expected of them.

They reported that business owners, like Zelalem, had been under paying
tax duties, by claiming that they earn less than
100,000 Br, annually.

The authority and the City Administration, which collected 4.5 billion
Br in tax revenues during 2010/11, and planned to
collect 5.6 billion Br tax during 2011/12, were
suprised with the revealing findings. ERCA agreed,
however, that the new assessment system should not
apply retroactively, to save businesses from being
closed down by being over burdened by the tax
payments, and the imposition of a three-month
penalty on the businesses that were alleged to be
hiding their actual income attribution.

The minimum of a three-month tax penalty imposed on businesses which
were allegedly underpaying taxes amounts to 20,000
Br, and can be increased by the authority depending
on the size and years of operation of the
businesses.

“Taxpayers could have been requested to pay millions in penalties, if
it was not for an agreement between ERCA and the
City Administration on behalf of the businesses,”
Mamo Abdi, tax and customs affairs adviser to the
Director General of ERCA, told Fortune.

The business owners in the city, however, who were forced to shift to
category “C” and instructed to pay higher taxes, do
not feel that they were granted favours by the
authority.

“The amount that I am required to pay does not take my income and
expenses into consideration,” said Zelalem in
frustration, because he says that he does not have
the money to pay the required amount.

His frustrations are echoed by many in the city, and other major towns
across the country, who are responding in different
ways, from breaking down into tears, to getting
physical with tax collection officials at the
weredas once they were notified of the amount they
are required to pay.

One such frustrated taxpayer is Abel Sheferaw. He has joined the ToT
scheme in the Bole District, which had 7,046
registered taxpayers in 2007. Abel opened his
four-year old business, which sells mobile phone
accessories and earns an average daily income of 60
Br he is located, around Gerji, a few minutes’ drive
from the Bob Marley Square. After the tax force
surveyed his business, he was notified to pay 3,000
Br, a significant increment from his previous tax
duty of 700Br, roughly a 328 pc increase.

Some taxpayers, like Abel, are claiming that they cannot afford to pay
the amount they are required, and the nightmare has
just begun.

Some have decided to shutdown their businesses, an eventuality that
neither ERCA nor the city wish, according to ERCA
and city officials.

Zelalem, who is supporting his mother through his business, has already
made up his mind to close his shop, although Abel
still has some capital saved to carry on.

The complaints from businesses and the calls for the revision of the
new valuation system have flared over the past few
weeks.

Tewodros Teshome, 32, and a resident of Adama (or Nazareth), 100Km east
of Addis Abeba, owns a share in a car garage. He
established the garage with two of his friends with
a capital of 4,000 Br eight years ago, paying 1,700
Br for rent, and employing 18 permanent and
part-time employees.

The Adama Special Zone Administration of Customs made a survey, and
included him and his peers in the category “C”
taxpayer list. In the past, they claimed to pay
about 2,500 Br, annually.

However, they are now required to pay 82,000 Br, an earth shattering
3,180pc increase with the newly enforced tax
valuation system.

Tewodros, and his friends, who were engaged in the business for the
last 22 years as employees, before opening their own
garage, claimed to have an income from about 100 Br
up to 500 Br. The car garage owners, who would
service a minimum of five vehicles on a daily basis,
have also collectively decided to shutdown their
business because of their new tax reality.

“I never even counted that amount of money in my entire life, let alone
pay that amount of money to the tax authority
annually,” he told Fortune, clearly angry.

Despite the frustrations, and the resistance to pay, tax authorities do
not plan to revise their projections for a minimum
of three years.

“The sharp increase of taxes businesses owed in such a short period of
time only signifies the instability of the tax
system,” a tax expert at the Addis Abeba University
told Fortune under condition of anonymity.

Experts in the industry also question the legitimacy of the survey in
the absence of a standardised tax assessment system
in the country.

“The estimation based on the survey may not be 100pc accurate, if
taxpayers have legitimate claims supported by
evidence they can submit their appeal,” Mamo told
Fortune.

A macroeconomist, who believes that taxpayers are disadvantaged, says
the taxpayers, who are required to pay more than
they are used to, would either shift the burden to
their customers by increasing prices, or close their
businesses, but in both cases the customers will
suffer the most, since commodity prices will
escalate. Otherwise, it will be difficult to get
commodities in the market due to the shortage of
players who can afford to pay the taxes.

He also argued that the tax valuation, which was revised considering
the inflation rate, does not represent the real
income of the businesses, as in the cases of
Zelalem, Abel and Tewodros. In reality, their income
has actually declined since they now spend more
money to buy fewer items.

“As a result, tax duties of the businesses should have been decreased,
instead of increasing tax rates,” the macroeconomist
argued.

Mamo, however, is persistent in his belief that the income of
businesses is on the rise, along with the growth of
the economy.”

Although official documents of the GDP show that the country’s economy
has grown by 11pc in the past five years, which
supports Mamo’s claim, no disaggregated data is
available to show that real income has increased as
much for businesses.

Taxpayers, who are aggrieved by the new tax system, could appeal to the
tax review committee of ERCA within 10 days, and its
tax appeal committee within 30 days. If they remain
dissatisfied they can take ERCA all the way to
court, according to the income tax proclamation
issued in 2002.

These options, however, do not seem to be solutions for most of
taxpayers, including Zelalem and Tewodros, who have
already given up hope and opted to shut down their
businesses. The new tax demands go too far, they
argue, and now they are left with no plans for the
future. They claim that they do not have the money
to pay ERCA, or proceed with tax appeal procedures,
which is 50pc upfront deposit of the tax amount they
are told they owe the state.